CDO Week: Cross border deals

The collateralized debt obligation market has showed no signs of slowing, with a few new names emerging from the sidelines.

Banco Comercial Portugues was said to be working on a synthetic balance sheet deal via joint leads Merrill Lynch and Deutsche Bank Alex. Brown. The deal will be backed by domestic bonds, credit default swaps, and loans.

Bank of America was putting together a EURO800 million synthetic balance sheet deal. Only EURO58 million of the deal is to be funded, market sources said. The deal is synthetically securitizing investment grade debt off Bank of America's balance sheet.

Also last week, Deerfield Asset Management was pitching European investors its $505 million investment grade CDO, Valeo II.

Although the arbitrage for investment-grade CDOs is getting narrower, spread can be found in synthetic securities, which Valeo II is expected to take advantage of, sources said (see synthetic, p.1). The deal is said to be at least 70% ramped-up, with a wrap on the triple-A A1 class from FSA.

Deerfield is expected to purchase 40% of the $20 million in the preferred shares. The projected equity return, with a 0% default assumption, is 19.3%. Using a base case of 25 basis points per annum of defaults the equity rate of return would be 17.6%; recoveries 50% on non-emerging markets, 30% emerging markets. The average rating is Baa2/Baa3 and the rating factor is expected to be 560.

CSFB is close to bringing the Stanfield Asset Management high-yield CDO that is said to be upsized.

Equity remains a tough sell

Buysiders say the three-plus months of stop-and-go bringing Octagon Investment Partners IV into the market has demonstrated the difficulties in selling equity in CDOs.

Prior to launch, price talk on the triple-A's moved out to 45-48 over Libor from 42-45 over Libor with European accounts. However, First Union launched the cashflow deal at significantly tighter levels than pre-launch talk.

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